CFP Board eNewsletter
May 2008
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CFP Board eNewsletter |
| Kids and Money: The Early Years |
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| How To Handle Home Equity |
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| Some Stimulus Rebates Go Astray | |
| Americans More Worried About Retirement; Health Costs A Big Concern |
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| Financial Alerts |
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| CFP Board Holding Free Financial Planning Clinics in Washington DC, Miami |
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| About This Newsletter |
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| Kids and Money: The Early Years |
This is the first in a series of four articles on children and money. In this series, It’s Your Turn presents some tools and tips to help both parents and children master the language of financial planning. This month’s article focuses on children between the ages of 5 and 10. Future articles in the series will deal with young adolescents and teenagers, college-age kids, and young adults who are still living at home. ‘Charity begins at home’ is a saying we all grow up with. It turns out, though, that charity is not the only financial virtue our families instill in us. Budgeting, saving, and managing money begin at home, too. A 2007 survey for the National Foundation for Credit Counseling (NFCC) found that nearly two-thirds of respondents said they learned about financial issues, such as balancing a checkbook and building savings, at home; less than half said they learned about those things at school. Unfortunately, though, those lessons don’t always stick. The NFCC survey also found that only a minority of Americans keep close track of their monthly expenses, for example, and roughly 40% do not or cannot pay off their credit cards in full every month, thereby incurring stiff interest and finance charges. Good financial practices may begin at home but, because money issues are becoming increasingly complicated, parents themselves can sometimes feel less than completely informed. Easy credit, peer pressure, consumerism, massive exposure to the media and advertising—they all can make financial conversations with children more difficult and, often, more tense. “Issues around kids and money really are more complex and challenging than ever,” says Joline Godfrey, author of Raising Financially Fit Kids and founder of the financial education firm Independent Means Inc. “Explaining it all to your children might be like trying to teach a foreign language you’ve never spoken yourself.” Godfrey describes the ages between 5 and 25 as “the financial apprenticeship years.” This is the crucial time when basic money management skills need to be put in place. Otherwise, a child could end up spending his or her early adulthood playing financial catch-up. “I coach families that money is just another language,” says Godfrey. “Just as you might urge your kids to learn Mandarin or Spanish for their futures, money is a language that can be learned. Start with the basics: Learn the vocabulary.” To this end, Godfrey suggests introducing basic financial terminology—words like ‘invest’ and ‘savings,’ for example—to children at a young age. “It’s never too early to use the words so the words begin to mean something,” she says. “Kids don’t have to be able to calculate compound interest by the time they’re 10, but they should be able to spell it.” It’s also important to make financial issues concrete. Take your child on a visit to the bank to open a savings account, Godfrey suggests, or select something central to your child’s life—food for the family pet, for example—and make your child aware of the cost of that item as part of your household budget. If you buy something on credit, show your child the credit card statement and explain how you pay the bill. Even something like running a lemonade stand or holding a yard sale can provide important lessons in economics and entrepreneurship. And it’s never too early to start planning for the long term. “Creating a nest egg, such as a 529 college savings plan, for your child emphasizes the importance of savings and can be a crucial part of helping achieve independence,” Godfrey says. (For more on 529 plans, see Saving for College with a 529 Plan in the April 2008 issue of It’s Your Turn.) Godfrey tells the story of one 9-year-old boy who was oblivious to money. He wouldn’t pay attention to his father’s periodic financial lessons and didn’t seem to care about anything except comic books, much to his father’s exasperation. So Godfrey suggested using comics to get the boy’s attention. The father created a weekly comic book budget and suddenly his son was interested. They even set aside some money every week to give to a non-profit organization that supported cartoonists. Setting up a savings plan that helps a child set allocations to different goals can be as simple as assembling a group of containers that are labeled for each goal. There are also fun products out there that can help teach young children positive money skills. One of Godfrey’s clients bought an ATM bank for her niece as a Christmas gift. The bank looks and sounds like a real ATM — when your child makes a deposit or withdrawal, the new account total pops up on screen — and helps counter what Godfrey describes as the “magical thinking” that leads many children to equate ATMs with free cash. To get something out of the ATM bank, you have to put something in. The Money Mama Piggy Bank™ is a lower-tech way of emphasizing savings. The ceramic bank has four compartments corresponding to the 10/10/10/70 concept of money management: 10% for charity, 10% for investments, 10% for savings, and 70% for everyday expenses. Godfrey started out in financial education with the project “An Income of Her Own,” which tried to give girls the tools they needed for an economic head start in life. She counsels parents to be aware that “gender differences around money begin early. Too little is often expected from girls, while too much is expected from boys. Girls get away with things; there’s not enough accountability, so they might never develop the skills they need for independence. And parents assume that boys know things, while they may be clueless and too embarrassed to admit it.” Godfrey’s advice is to be gender neutral: Hold girls to their allowances and don’t assume boys understand things just because they’re boys. Speaking of allowances, there is probably no other subject as controversial when it comes to kids and money. If you do decide to give your child an allowance, Godfrey suggests making clear that the money is not an entitlement or even a salary, but an opportunity to learn the basics of financial management. And for parents, it’s equally important to remember that an allowance is not a way to enforce discipline. “Do not use the allowance as a tool for behavioural control,” Godfrey writes in Raising Financially Fit Kids. “Money anxieties are deeply embedded in our psyches. Connecting an allowance to emotional or behavioral control exacerbates this and doesn’t do much to help the child develop healthy financial habits.” “When talking about financial issues with children, truth is always good,” Godfrey says. “Kids these days are savvy, and they know stuff anyway. If you give kids real-life information, they will be better grounded. They get to know about sex and drugs at earlier ages; now, they need to know about money, too. The media is always on message to spend and consume, so parents need to be always on message to save and conserve.”
Next month: Kids and Money II — The Adolescent Years.
Online Resources
The Kids and Money page on the Family Education Network consumer information site has a wide range of articles and games that can help parents talk to children about financial topics and teach them the value of saving and spending wisely.
KidsBank.com, sponsored by Sovereign Bank, explains the fundamentals of money and banking, including savings, interest, checking, and electronic banking. A game room offers 10 multiple choice quizzes based on information on the site, which also features two savings calculators: one enables kids to figure out how much they can save by specific dates, and the other shows how much they can save over a certain number of years.
Kids’ Money features a comprehensive list of books, Web sites and other resources related to kids and money.
MoneyInstructor.com provides learning materials, games, and activities to help teachers working with children of all ages. The Kids and Money page features information on personal finance, allowances, and starting a business.
Planet Orange, sponsored by the bank ING Direct, offers kid-friendly tips for setting budgets, understanding credit, and building savings. The Parent’s Corner section explains how the site works.
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| How To Handle Home Equity |
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Michael Rubin, CFP®, founder of the financial education firm Total Candor, tells the story of a Philadelphia Eagles fan who made the trek to Jacksonville, Fla., in 2005 to watch his team play the New England Patriots in the Super Bowl. The tickets alone cost a couple of thousand dollars. With flights, hotels and meals thrown in, this dedicated fan ended up spending some $20,000 on the trip. “That’s okay,” he said, justifying the enormous expense, “the value of my house has gone up by that much in the past six months.” Well, the Eagles lost that game 24-21, and as the current credit crunch has rippled through the economy, many people are losing the opportunity to tap their home equity for extra cash. The equity in a home is the amount the property is worth minus the amount the homeowner owes on the mortgage. If your home is worth, say, $200,000 and you have an outstanding mortgage of $100,000, then the equity in your home is $100,000. Homeowners can borrow money based on their equity — and that’s exactly what they have been doing, to the tune of some $2 trillion since 2001, according to the industry newsletter Inside Mortgage Finance. A 2006 study by the Pew Research Center found that around 20% of homeowners had borrowed money against the equity in their homes. But with the economy sputtering and real estate prices dropping in many parts of the country, banks are not lending as freely — and many people are starting to feel the pinch. So here are some tips on how to handle home equity. “Home equity loans were never intended as a path to funding a lifestyle you couldn’t otherwise afford,” says Rubin, who is also the author of the financial planning book Beyond Paycheck to Paycheck. “But when house prices were going up at such a rapid clip, tapping into home equity allowed people to spend more than they actually earned.” Rubin points out that annual house price rises of 20 percent are not the norm. Yet that kind of unsustainable growth convinced people that taking out a home equity loan didn’t really mean going into debt. Like the Eagles fan, people thought the increased equity in their homes would cover the cost of the additional borrowing. Now that house prices are falling back to earth, it’s time for many homeowners to take a more cautious, realistic look at equity. There are two basic types of borrowing against the value of your home. A home equity line of credit (HELOC) is a revolving loan that works something like a credit card. The bank extends a line of credit, with a maximum credit limit, which you can use as and when you see fit. The amount you actually borrow, and the interest rate you pay, can vary over time. The difference between a home equity line of credit and a credit card is that a HELOC, unlike a credit card, is secured against your assets: namely, your home. If you fail to make payments, your home is on the line. A home equity loan is much more like a second mortgage. You borrow a fixed amount at a fixed interest rate, with a fixed series of monthly re-payments. For both types of borrowing, lenders will base the amount of the loan on the estimated equity in your home as well as their assessment of your credit history and your ability to repay. There are also costs associated with home equity loans and lines of credit (fees for appraisals, applications, attorneys, etc…) similar to those associated with primary mortgages. And if you can’t make the monthly repayments, your home is at risk. Home equity loans and lines of credit can be advantageous ways to borrow money. Interest rates tend to be much lower than those for credit cards, for example, and interest payments are typically tax deductible. The key question to ask, though, says Rubin, is “What is the purpose of the borrowing? If your finances are sound and you have not borrowed excessively in the past, there is no reason why you shouldn’t use your home equity.” So, for example, if you need extra funds to complete a home improvement or to help pay for education costs, then tapping your home equity might be in order. Debt consolidation could be another reason to borrow against the equity in your home. If you’re carrying a lot of very high-interest credit card debt, for instance, it could make sense to use a lower-interest HELOC or loan to pay off the cards, thus potentially saving you a bundle on interest payments. “But make sure you have the financial discipline to pay off your debt,” Rubin warns. “Do a sanity check. Ask yourself how overstretched you are, whether you’ve passed the point of no return. If you tap home equity and then start using credit cards again in a moment of weakness at the mall, you’re just adding more debt. You could make things far worse.” It is never a good idea to use your home equity to bridge the gap between what you earn and what you spend. If you tap home equity to pay for things like, say, a trip to the Super Bowl, you’re likely to just dig yourself deeper into a hole. And, if the value of your home falls far enough, you may end up owing more in HELOCs or loans than your house is actually worth. To avoid that, many banks are declining loan requests or freezing credit lines. “Lenders are less forgiving,” Rubin says, but if they turn you down or freeze your credit they could be “doing you a favor by ensuring that you don’t get further over-extended.” Should you find yourself in a home equity hole, Rubin urges a return to financial planning basics: “Live within your means. Get your spending under control so that you spend less than you earn, not less than the value of your home appreciation. Recognize the new financial world we’re living in. And remember that until you sell the house, the money you have in equity is not really yours.”
If you think a HELOC or loan might be right for you, shop around for the best deal, carefully read the terms and conditions, and make sure you can pay off the additional debt you’re taking on. You might also want to get professional advice. You can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site.
If you change your mind for any reason, the Truth in Lending Act enables you to cancel the credit at no cost within three days. You can find details of your rights to cancel a home equity loan on the Web site of the Federal Trade Commission, the government’s consumer protection agency — Home Equity Loans: The Three-Day Cancellation Rule. One more tip: maybe resign yourself to watching the Super Bowl on television.
Online Resources
The Web site of the Federal Reserve, the U.S. central bank, offers When Your Home Is on the Line: What You Should Know about Home Equity Lines of Credit, which has detailed information on home equity and the comparative advantages of HELOCs and home equity loans. The Federal Reserve also has a helpful overview of issues to consider before borrowing against the value of your home: Putting Your Home on the Loan Line Is Risky Business.
The Web site of the Federal Trade Commission, the government’s consumer protection agency, features Shopping for a Home Equity Loan?, which contains tips and a worksheet for comparing loan plans to get the best deal. The FTC also offers Home Equity Loans: Borrowers Beware!, a guide to the abusive or exploitative practices — such as hidden loan terms, unwanted “benefits” and insurance, and unscrupulous building agreements — sometimes employed by lenders.
Financial information site Bankrate.com provides an overview of Types of Home Equity Loans that lists a point-by-point comparison of the pros and cons of the two different types of loans. The Bankrate.com site also features a worksheet with Questions To Ask Home Equity Lenders and a Home Equity Calculator to help you decide whether (or how much) to borrow against your home equity.
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| Some Stimulus Rebates Go Astray |
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Almost 46 million stimulus payments totaling about $41 billion were sent to taxpayers in the three weeks ended May 16, according to the U.S. Treasury Department. But at least a few of those payments ended up in the wrong bank accounts, the IRS said. About 1,500 of these payments went to the wrong bank account and the IRS is working with taxpayers and banks on a case-by-case basis to resolve this issue as quickly as possible. The tax agency says taxpayer human error and computer glitches were responsible for the problem affecting a tiny percentage of the 130 million taxpayers expected to benefit from the refunds the government began sending out last month. The stimulus checks are for up to $600 for a qualifying single taxpayer, $1,200 for a couple filing jointly, and $300 additional per child. Distribution began in late April, starting with taxpayers who had requested electronic deposits, and are continuing in weekly waves based on the ending digits in Social Security numbers. Paper checks will be sent out in the same way up until July 11. The IRS expects to hit 130 million refunds by the end of June, with the last checks — except for those who requested extensions in filing their returns and a few other exceptions — going out in July If you are waiting for a stimulus or 2007 tax refund checks, the IRS suggests you check with its Web site, or the toll-free service Refund Hotline at 800-829-1954.
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| Americans More Worried About Retirement, Health Costs a Big Concern |
A survey released last month by the Employee Benefit Research Institute (EBRI) says that the percentage of workers who are very confident about having enough money to fund a comfortable retirement fell sharply to 18 percent in January from 27 percent in 2007 — the biggest one-year drop since EBRI began tracking worker attitudes toward retirement savings 18 years ago. The percentage of retirees who are very confident about their ability to have a financially secure retirement also dropped — to 29 percent from 41 percent last year, the survey found. At the same time, the number of workers who aren’t confident they can save enough to retire comfortably increased from 29 percent to 37 percent in 2007, and among retirees, the percentage rose from 21 to 34. Consumer debt and the economic downturn in large part caused 14 percent of workers to say that in the last year they’ve postponed retirement, according to the survey of more than 1,300 people. Those polled in the EBRI survey said that rising health care costs are a key obstacle to retirement security. Nearly half of the workers interviewed, 45 percent, said they aren’t confident they can cover medical expenses in their later years, up from 34 percent in 2007. And 56 percent said they’re worried about long-term care costs, up from 47 percent last year. Fifty-four percent left the workforce earlier than planned because of, in part, health problems or disabilities. Almost half of retirees said they have spent more on health care than expected. More than half of retirees, 54 percent, said they are more concerned about their financial future now than they were immediately after they retired. The survey did find some good news. More workers seem to be planning for retirement. Nearly three-quarters of workers, 72 percent, said they have saved for retirement, compared with 66 percent last year. But most people’s savings are modest. According to the EBRI survey, 49 percent of workers reported less than $50,000 in savings and investments, excluding home values and pension plans. What’s worse, 22 percent of workers and 28 percent of retirees said they have no savings at all.
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| Financial Alerts |
Beware of Online Job Classifieds Used to Steal Your Identity In another variation of identity theft scams, stock traders posing as employees of a made-up Latvian brokerage firm appear to have stolen personal information from individuals who thought they were applying for a job through the popular classifieds Web site, Craigslist, according to an alert from the Financial Industry Regulatory Authority (FINRA). According to a complaint filed by the Securities and Exchange Commission, these traders allegedly used the job applicants' Social Security numbers, dates of birth and other information to open up online brokerage accounts. Applicants were told that the firm would need this information to conduct company "background checks" — because the firm would be entrusting them with the firm's money. The traders appear to have communicated only by email or fax. After "hiring" several individuals, the firm allegedly sent funds to those individuals' personal bank accounts using wire transfers from Russian bank accounts and a Western Union money order. The individuals were instructed to wire those funds from their bank accounts to specific account numbers — which corresponded to the brokerage accounts opened with their personal information, without their knowledge. In addition, the traders allegedly used stolen user IDs and passwords to gain unauthorized Internet access into existing brokerage accounts of unsuspecting victims. Using the new and existing brokerage accounts, the traders used sophisticated strategies to trade and manipulate the prices of a number of thinly traded stocks — at a handsome profit. FINRA urges investors, when conducting any activity on the Internet, always to be on guard and to check out anyone who is asking for your personal information before you give it out. Not every request for your Social Security number is an effort to steal your identity — but not every request is mandatory. With some healthy skepticism and caution, you can take steps to protect your identity, so that the Internet remains a source of convenience — not heartache. You can find more information on this particular scam here. Read more financial alerts.
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| CFP Board Holding Free Financial Planning Clinics in Washington DC, Miami |
CFP Board is preparing to hold two free Financial Planning Clinics this year — in Washington DC on Saturday, Sept. 13, and in Miami, Fla., on Saturday, Nov. 15. Both clinics will be held from 11:00 a.m. to 4:00 p.m
Now in its third year, CFP Board’s Financial Planning Clinic is designed to give consumers an opportunity to address their specific financial questions to CFP® professionals who volunteer their time and expertise for the event. Volunteers will be seated at tables designated for a specific financial planning topic. The process is as easy as choosing a topic and heading over to the appropriate table. Volunteers will be separated according to these topics:
The Financial Planning Clinics include Educational Workshops on a range of financial topics presented by leading experts in personal finance who are CFP® professionals. The clinics are part of CFP Board’s efforts to educate the public about the benefits of ethical and competent personal financial planning and the value of the financial planning process. Free online registration and additional information about CFP Board’s Financial Planning Clinics is available on CFP Board’s Web site, www.CFP.net.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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